Maxing out my Tax Free Payment into LGPS using AVC

Jimbobdibob

@AlanP_2

Thank you for your detailed response. I now think I understand PIA which will be useful moving forward.

The ‘exceeding the AA’ I am concerned about is the limitation of contributing only up to what is earned in a year.

As an (back of a fag packet) example I earn £24k therefore approx. £500 pension a year and PIA = £8k. My net pay is £1600 / month so putting in AVC 1600 x 1.25 (tax uplift) x 12 (months of year) = £24k. Total pension input is £32k whilst my personal AA is only 24k.

I have probably misunderstood and would be grateful for comments (looking to maximise for a long term LGPS member)

Another point that I would appreciate help on please.

In the above example I am guessing the AVC pot would be far greater than 25% therefore counterproductive.

Using the figures from above i.e. approximately £500/annum pension what is the amount of AVC I should be looking at to maximise 25% tax free withdrawal? Is the value of pension again *16 and therefore I should be looking at £2k AVC each year? 

AlanP_2

You are making the common mistake of confusing two limits related to pension contributions.

The first, and most relevant to you, is the Income Limit. You cannot contribute more than your earned income in a tax year to a pension plan. The official terminology is "relevant income" and for the vast majority that means salary.

So the maximum you can contribute to any pension scheme is £24k gross contributions including any tax relief. You will have contributed something to your LGPS main scheme already so you need to take that off what you have left to contribute.

The second limit is the Annual Allowance. This is not personal it is a fixed amount of £60k. Your contributions including tax relief and your employer's contributions count towards this for a standard DC scheme but as explained earlier DB schemes use the PIA to approximate this amount. In certain circumstances previous years unused PIA may be available to make higher pension contributions via "carry forward". Again, this is not relevant to your situation. 

You are restricted to the lower of these two limits that apply to your situation.

As an (back of a fag packet) example I earn £24k therefore approx. £500 pension a year and PIA = £8k. My net pay is £1600 / month so putting in AVC 1600 x 1.25 (tax uplift) x 12 (months of year) = £24k. Total pension input is £32k whilst my personal AA is only 24k.

So ignore the PIA for now as on a salary of £24k there is no way you can get to the point where AA becomes an issue.

If you were to contribute £1600 p/m into an AVC you wouldn't get a 25% tax uplift on it as the LGPS scheme works on deducting pension contributions from Gross Pay before calculating income tax due - called a Net Pay system.

This may well be different to any DC schemes you have had in the past where pension contributions are deducted after tax has been calculated. The DC contribution is then passed to the provider who reclaims 25% basic rate relief on your behalf. This is called a Relief at Source system.

The amount of tax paid ends up being correct irrespective of the method in use so no one loses out.

The disadvantage of a net pay system form your point of view is that you can only get tax relief to the extent that tax would have been paid.

Gross Salary = £24,000

Personal Allowance = £12,570

Taxable Pay = £11,430. This would be the most that LGPS pension contributions could be and still benefit from tax relief.

Compare this to a RAS DC system and you could pay your £1600 net per month into that and get 25% tax relief on it all even though you never paid any tax on some of it.

The way round this, if you want to pay as much as possible in to pensions, is to use LGPS AVC to get taxable pay down to £0 and then put the rest into a personal pension with ANO company.

The limit on what you could take out tax free at retirement is calculated as:

((20 * Annual Pension) + AVC Lump Sum built up) / 4 so as a rough calculation ((20 * £500) / 3) would tell you how much that final 1/4 should be (£3333.33) so approx £278 per month.

It won't work out exactly like that as CPI increases to your accrued pension, pay rises, promotions, and investment performance in the future will all flex those basic calculations.

Jimbobdibob

@AlanP_2

Thank you again, absolutely fabulous. This answers all my hard of understanding questions.

It's like having an IFA for free  (edit. who is not giving advice,  just hints and tips)

You and others provide such a service to random unknowns, medals deserved.

MX5huggy

“ Using the figures from above i.e. approximately £500/annum pension what is the amount of AVC I should be looking at to maximise 25% tax free withdrawal? Is the value of pension again *16 and therefore I should be looking at £2k AVC each year? ”

No, you can use all the LGPS you have all ready accrued since 1990 to match with you AVC fund its not a year by year thing so if you’ve got a Pension of £17k that is valued at 20x so £340k 25% of that is £84k use the official calculator because I’ve not taken into account your compulsory lump sum.

so because you only have a couple of years left you’re not going to get close to exceeding the maximum AVC that you can take tax free. 

https://www.lgpsmember.org/help-and-support/tools-and-calculators/maximum-avc-lump-sum-calculator/

My_perfect_cousin

Not sure whether this adds much to that previously offered, but here goes.

The Annual Allowance changed from £40K to £60K recentlyish. It's worth finding out how much you 'used' in the previous three years. I believe that you can carry forward any 'underuse' from the past three years. 

Life Time Allowance has gone in theory but... I believe that the maximum cash that you can take IF you take your AVC at the same time as your pension is capped at 25% of the LTA figure. This equates to something like £268K total.

What's therefore helpful if to get the most accurate valuation of the AVC cash value at the time that you decide the balance of cash lump sum from pension v regular pension. Stating the obvious, it may be possible to select a pension lump sum that, when added to the AVC cash, falls below the 25% of LTA figure.